Even though it's taken Western economies several years to regain
pre-crisis national output levels, many doubt banks will ever
revisit the pre-crisis high watermark of their trading activities.
Revenues from fixed income, currencies and commodities - the
so-called 'FICC' universe - continued to tumble for most major U.S.
and European banks during the first quarter of 2014, increasing the
pressure on them to rethink business models.
Thanks to a more stringent regulatory environment and a potential
turning point in the 20-year cycle of falling global interest rates,
the twin peaks of just before and after the 2008 global financial
crisis look unlikely to be revisited.
Revenue from FICC amd equity trading, which critics sometimes dub
"casino banking" and distinguish from traditional investment banking
services like underwriting share issues or arranging mergers and
acquisitions, still accounts for over 70 percent of banks' overall
income from investment banking, according to research by Freeman
FICC and equity trading income at Goldman Sachs last year was 72
percent of the bank's overall revenue from investment banking,
compared with 82 percent in 2010. Morgan Stanley's FICC and equity
trading revenue was 70 percent of its total investment banking
revenue, well down from 82 percent in 2003.
The FICC share of these trading revenues is shrinking. In 2007
around 70 percent of Goldman's $22.89 billion overall trading
revenue came from FICC. Last year, barely half its $15.72 billion of
such revenue was from FICC, according to Freeman.
In 2006 FICC income accounted for just over 60 percent of Morgan
Stanley's $15.9 billion overall trading revenue, compared to just 35
percent of the $10.1 billion pie last year, the consultancy said.
As new regulation bites and extraordinary monetary and economic
policies smother extreme market swings, the trading volumes and
price volatility that middlemen banking traders thrive off has
And it looks like a structural shift rather than a cyclical or
"The revenues have gone. The world has changed from 2007, 2008,"
said Grant Peterkin, head of absolute bond returns at Lombard Odier
"The regulatory aspect is the biggest aspect."
Regulation after the 2007-08 crisis such as 'Dodd-Frank' and 'Volcker
Rule' legislation in the United States and Basel III banking reforms
globally, effectively restrict banks' ability to hold, trade and
speculate on fixed income and derivatives.
This reduces liquidity, but other traditional liquidity providers
like hedge funds have been unable to fill the gap because their
businesses are also under pressure.
IN A FICC
The pressure on banks' FICC operations was brought into sharp focus
by the broad-based slump in first-quarter earnings.
British bank Barclays grabbed the headlines, posting a 41 percent
plunge in trading revenue compared with the same period in 2013,
then announcing 7,000 of its 26,000 investment banking jobs will be
"Some of the pressures we saw on the business towards the end of
last year are clearly structural as well as cyclical," Barclays
Chief Executive Antony Jenkins told CNBC on Thursday.
Other bank chief executives are likely to follow Jenkins in terms of
direction if not magnitude, and reduce the size of their FICC
trading desk operations, analysts say.
They are expected to continue cutting costs, trimming headcount, and
in some cases, exit particular markets.
[to top of second column]
UBS is withdrawing from parts of fixed income trading while Barclays
has consolidated its G10 currency, emerging market foreign exchange
and precious metals trading operations.
Elsewhere, JP Morgan Chase is selling its physical commodities
business and Deutsche Bank is closing its oil, grains and industrial
Although Barclays' results may be an outlier and contrast with
other extremes, such as the 35 percent increase in trading revenues
at the likes of Morgan Stanley, the average decline in FICC revenue
from 10 major U.S. and European banks in the first quarter was 14
That ongoing funk was all the more alarming as the first quarter is
traditionally the most profitable for FICC trading, as pension and
insurance funds open fresh investment positions for the year and
companies and governments sell new bonds in an annual refunding
The 10 banks showed FICC revenues totaled $24.18 billion in the
first quarter, down from just over $28 billion a year earlier and
almost $30 billion for the same period in 2012.
The 10 are: Barclays, U.S. banks JP Morgan, Morgan Stanley, Goldman
Sachs, Bank of America, Citi, and European firms UBS, Deutsch, BNP
Paribas and Credit Suisse.
The collapse in market volatility has also contributed to the
decline. This may be a relief for risk-averse investors but it also
makes them less likely to use market hedging instruments sold by the
It also reduces the arbitrage opportunities that nimble banks and
brokers feed off for in-house trading profits.
Implied volatility, which measures the potential for asset price
swings over a specific period, is at or close to record lows in
deeply liquid and highly-traded assets like U.S. Treasuries,
euro/dollar and dollar/yen.
Analysts also say the whiff of scandal resulting from global
investigations into alleged rigging of benchmark foreign exchange
rates and Libor interest rates is clouding the FICC environment, and
forcing banks to set aside billions of dollars for potential
The final nail in the FICC coffin, analysts say, is that the world
on the cusp of rising interest rate cycle, led by the U.S. Federal
Reserve's reduction - or "tapering" - of its extraordinary
It's completely uncharted territory for banks and traders, and not
conducive to making easy money.
"We've had the most enormous change," said Chris Wheeler, banking
analyst at Mediobanca in London. "And there's more to come as the
full impact of tapering is felt."
(Corrects paragraphs 5 and 6 and adds paragraphs 7 and 8 to specify
that revenues referred to include equity trading and are percentages
of total revenues from investment banking alone, and to detail FICC
share of overall trading revenue)
(Editing by Sophie Hares)
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